[email protected]’s management hopes to use bankruptcy protection to shed $4.5 billion in debt.
In case you missed the news, Arch Coal, North America’s second largest coal company, filed for bankruptcy a few weeks back. Arch’s management hopes to use bankruptcy protection to shed $4.5 billion in debt—money that Arch borrowed from investors near the peak of the coal market but that the company can’t pay back now that coal prices have tumbled.
To anyone paying attention, Arch’s insolvency came as no surprise. The company had missed a bond interest payment in mid-December after unsuccessful negotiations with creditors. Besides, coal industry bankruptcies are now a dime a dozen: Alpha Natural Resources, the #4 coal company in the US, declared bankruptcy in August; Walter Energy declared itself insolvent in July; and Patriot Coal filed for Chapter 11 protection in October, its second filing since 2012. All told, nearly 50 US coal mining companies have filed for bankruptcy protection since the beginning of 2012.
Arch’s bankruptcy obviously highlights the dire state of the industry’s finances. But it also raises important questions about public policy, fiscal responsibility, and the fate of the coal industry itself. Here are the top five stories that I’m going to keep my eye on as the Arch Coal bankruptcy unfolds.
1. How much will the executives pay themselves for failing?
Coal industry bigwigs like to blame their troubles on Obama’s alleged “war on coal.” But in reality the blame for bankruptcy sits squarely on the shoulders of coal executives.
It was industry executives, not the Obama administration, who loaded their companies with enormous debts. It was the executives who misread the market, paying top dollar for mines when coal prices were near their peak. In short, it was the executives whose hubris and poor judgment doomed their companies.
So you might expect that coal industry executives would be the ones paying the most for their failures.
But you’d be wrong! Just look at the Alpha Natural Resources bankruptcy: over fierce union objections, a federal judge recently approved an executive bonus package worth up to $12 million to the same management team that steered the company into the ditch. Even Alpha’s ex-CEO excoriated the bonus package, saying it didn’t represent “the values the company was built on.” But apparently, the current executives hold to different values and see bankruptcy as yet another opportunity get rich.
Now, as Arch’s bankruptcy proceeds, we should all keep a sharp eye out for how much the company’s executive team decides to pay itself for squandering investors’ money.
2. How badly will workers get hurt?
Bankruptcy courts often let insolvent companies curtail expenses by shredding labor contracts and slashing retiree benefits. That’s exactly what’s happened in the Alpha bankruptcy, where executives have asked the court for permission to cut health and life insurance benefits for 4,500 retirees, while making 6,670 current employees ineligible for those benefits in the future.
So far, Arch hasn’t announced significant layoffs or disruptions to pensions. But as the bankruptcy proceeds, we’ll have to see whether it’ll remain so generous.
3. How much money will Arch set aside to clean up its mines?
Bankruptcy courts have allowed Arch to continue to mine despite setting aside only $75 million to cover its $458 million in self-bonded cleanup obligations.
US law requires coal companies to put up financial guarantees ensuring that they can clean up their played-out mines. Without those assurances, bankrupt coal companies could leave massive scars on the landscape, saddling states with billions of dollars in mine rehabilitation costs.
Yet several giant coal companies have exploited a loophole called “self-bonding” to avoid setting aside cleanup money. Self-bonding was designed for companies in excellent financial health—firms for which bankruptcy was unthinkable. Big coal conglomerates, however, have played shell games with their finances, establishing subsidiaries that seemed healthy enough to self-bond, even as the parent corporations slid towards insolvency.
Arch Coal played these games masterfully. In Wyoming, Arch self-bonded through a corporate subsidiary that owned many of Arch’s western mines, but held very little of the company’s debt. With plenty of assets and few liabilities, the subsidiary’s balance sheet appeared in tip-top shape. But when Arch’s parent corporation descended into the financial abyss, it pulled its allegedly “healthy” self-bonded subsidiary into bankruptcy with it.
Pliant state and federal regulators who turned a blind eye to these financial shenanigans now are paying for their lax oversight: Arch Coal simply doesn’t have enough money to replace its self-bonds with real cleanup guarantees. Worse, bankruptcy courts have allowed Arch to continue to mine despite setting aside only $75 million to cover its $458 million in self-bonded cleanup obligations. Federal mining overseers recently ordered Wyoming to explain how the state has allowed coal companies to mine without proper cleanup bonds. But that oversight came far too late; if the feds had wanted to guarantee that Arch had the money to guarantee cleanup, they should have acted before the company slid into bankruptcy.
It’s now anyone’s guess how the bankruptcy court will deal with the cleanup funding shortfalls. Whatever the court decides, there will be huge implications for state fiscal policy, for the financial health of the company that emerges from bankruptcy, and, of course, for landowners near Arch’s mines, who will pay a huge price if the company can’t clean up its messes.
4. How will insolvency affect Arch’s business partners?
On the very first day of its bankruptcy, Arch asked the court for permission to tear up its contracts with its shipping partners, including the BNSF railroad, the Ridley coal terminal in British Columbia, and energy transportation giant Kinder Morgan.
The news came at a terrible time for the shipping companies, who’d counted on the Arch contracts to give some certainty in the midst of a coal shipping slump. Now, Kinder Morgan stands to lose “hundreds of millions” from the canceled contracts, while the struggling Ridley coal terminal, already suffering through a devastating financial collapse, will lose “millions.” The market has already dinged Kinder Morgan on the news, and BNSF recently announced deep cuts to capital expenditures due to slumping rail volumes and faltering revenues. I’ll definitely be keeping an eye on Ridley’s financial statements, to see how Arch’s decision affects the terminal’s already dismal finances.
5. How will Arch’s bankruptcy affect other coal companies?
Perhaps the biggest unknown of all is how Arch’s bankruptcy will affect its peers, both solvent and insolvent.
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On the one hand, bankruptcy could allow Arch to shutter its least profitable mines, reducing the oversupply that’s pushed North American coal prices so low. On the other hand, Arch may well emerge from insolvency as a leaner competitor with lower labor costs and less debt. The balance between these two forces—lower production vs. a leaner and meaner company—will determine how Arch’s insolvency will affect its competitors.
Other companies will certainly be hoping that Arch sees bankruptcy as an opportunity to reduce production. That’s what Alpha, Walter, and Patriot did. Because shuttering unprofitable mines can be even more expensive than keeping them open, these companies couldn’t even contemplate closing mines while they were struggling to service their debts. But the protection of bankruptcy gave them the breathing room to shut down money-losing operations.
Arch, however, has signaled that even though the company is insolvent, it has no plans to shutter any mines. Executives apparently think that once they shed their debts, their coal operations will be on solid ground. In fact, while Arch thinks that 2016 will be an off year, it projects its coal sales to increase by 10 million tons in 2017.
That forecast is undoubtedly optimistic. Nonetheless, Arch’s plan to force more coal into an oversupplied market has left competitors shaking in their boots. Coal baron Bob Murray has complained that every new coal industry bankruptcy “depresses the value of the debts of all coal producers, including those who are financially surviving, and pushes them downward toward economic default.” Further, he thinks bankruptcy can allow companies to keep marginal mines open: “production does not decline, prices are depressed, and every coal company is dangerously threatened or pulled into this downward financial spiral.”
Murray, of course, has his own agenda, which includes convincing cash-strapped states to cut taxes on coal. Still, it will be very interesting to see whether Arch’s insolvency ultimately pulls other coal companies underwater as well.
Coal industry bankruptcies: What hangs in the balance?
Much of the press coverage of Arch’s bankruptcy will look at the biggest of pictures: the decline of the industrial revolution’s first fossil fuel and the slow, piecemeal transition to cleaner power. Still other press accounts will take a microscope to courtroom maneuverings and legal minutiae.
Yet some of the most important stories lie somewhere in between the forest and the trees. At that resolution, if you peer through the legal fog of bankruptcy, you can see a morality play coalescing: a drama illustrating how the bankruptcy process—and its imperative for reviving a financial corpse into a viable company—can grind away at both human compassion and obligations to our natural heritage.
In my view, a responsible bankruptcy process would favor workers and retirees over executives. It would ensure that coal companies paid to clean up their messes before paying out investors. And it would help our communities effect a fair and orderly transition to the new economic reality of radically lower demand for coal. But as recent history shows, bankruptcy can be anything but responsible. We may well see executives enrich themselves at the expense of the workers who made them rich; we may see courts setting aside money for investors even as they shortchange communities coping with a scarred landscape; and we may see continued chaos and uncertainty for entire sectors of the economy, unsure of how, and how fast, to adjust to change.
The way that these unheralded, often-overlooked stories play out will determine whether Arch’s bankruptcy turns into a force for constructive change, or just another sad chapter in the history of a dying industry. Those are the stories that I’ll be keeping my eye on.